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Social Impact Bonds a ‘Game Changer’ for Australia

The Centre for Social Impact’s inaugural Social Finance Forum has been told that Social Impact Bonds (SIBS) could be a ‘game changer’ in funding, benchmarking transparency and driving innovation in the Australian Not for Profit sector.

Social Impact Bonds a ‘Game Changer’ for AustraliaThursday, 27th September 2012 at 11:55 am

Prue Goward MP delivers her keynote speech at the Social Finance Forum in Sydney. Photo: Centre for Social Impact

The Centre for Social Impact’s inaugural Social Finance Forum has been told that Social Impact Bonds (SIBS) could be a ‘game changer’ in funding, benchmarking transparency and driving innovation in the Australian Not for Profit sector.

The New South Wales Minister for Family and Community Services, Pru Goward told Forum delegates “I think it is a wonderful concept we should be delighted to share and propose.”

A SIB is a multi-stakeholder partnership in which philanthropic funders and impact investors—not governments—take on the financial risk of expanding preventive programs that help poor and vulnerable people.

The Centre for Social Impact (CSI) says the way a SIB works is by a bond-issuing organisation raising capital from investors, based on a contract with government, to deliver improved social outcomes that generate future government costs savings. As well as repaying the principal, investors are paid a reward if the agreed outcomes are achieved.

“What could be more attractive than an ethical investment,” Pru Goward said in her keynote address.

More than 100 delegates attended the conference including international speakers to discuss the latest moves and developments in Social Impact Bonds in Australia and overseas.

Some of the key topics covered included proposing and project managing a Social Benefit Bond and the impact measurement challenges.

Minister Goward said that it was important for SIBs to be able to be measured and transparent if they are to be successful.

Using the example of Out of Home Care for vulnerable children in New South Wales, she said “we can absolutely measure benefits”.

Prof Peter Shergold the Chair of the NSW Social Investment Expert Advisory Group said the scheme could be a "win-win-win for the state, with better outcomes, less risk for the government and more involvement by the private sector with community organisations”.

Alan Hargreaves, Chairman of the Newpin Advisory Group told to the conference that he had already decided he would be investing in the social bonds.

“I conceptually think this is a great move,” he said. “I do believe there is a return there.”

“Far too long I’ve been writing a cheque without getting any money back.”

He explained that in the case of SIB programs preventing children being removed from their parents there is the opportunity to return to a great deal of dignity to these people.

The Chief Executive of UK company Social Finance, David Hutchinson, told the Sydney Forum about the success of the UK’s Social Impact Bond program.

“Investors are excited because for the first time financial investment can directly trigger social outcome,” he said.

In 2010 the first Social Impact Bond was signed with the UK Ministry of Justice to provide a program to work with inmates of the Peterborough Prison who were soon to be released. The social program worked with them to reduce the likelihood that they would reoffend and end up back in jail.

Hutchinson spoke about the benefit to the community after they were released from the prison.

“There was considerable value by introducing our clients into other (social) services in the area.”

David Hutchinson explained what was required for a SIB to be successful:

Robust outcome measured

Clearly defined target group

Cost of intervention is small relative to potential public sector value

Issue area a priority to the public sector

Issue area a priority for investors

“There are issues on the table that I can’t see investors wanting to take,” Hutchinson said.

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2 Comments

While it may be a little early to suggest social impact bonds will be a 'game changer', considering these bonds have only been in place globally for a few years and the social impact of current programs is still being measured, there are aspects of social impact bonds that may contribute to any game changing.

Social Impact bonds are a symptom of a deeper issue; that being the high cost of providing solutions to systemic social issues and the limited bucket of funding available from Governments and philanthropy to fund those solutions. The emergence of social impact bonds is consistent with Government policy, being to shift funding and responsibility for outcomes away from Government itself.

Social impact bonds are the thin edge of a wedge, a sign that that the sector is starting to become creative in how it goes about funding social solutions. It is unlikely social impact bonds will be the only creative funding solution. In time, other new and different funding instruments will emerge to add further complexity to the financial management of not for profit organisations.

Offering investors a return on their investment is a surefire way to catch the attention of those seeking to invest in social outcomes. No doubt if an investor has an option of gaining a financial return on investment they will put their funds in that direction. How might that impact upon those programs that also need funding but are unable to offer a return upon investment?

The nature of systemic issues suggest they are global in nature and that any nonprofit organisation involved in providing the solution will need to have sufficient resources to deliver a solution over an entire State or even an entire country. This implies the vast majority of not for profit organisations would not be able to participate in, or benefit from this form of funding. Though it is possible some may benefit from forming partnerships with larger providers.

The desire by Government to have social impact bonds viewed as a genuine funding tool suggests they will grab the low hanging fruit as their demonstration platform. Is it possible social impact bonds are only suited as a funding instrument for a certain class of social issue? In the meantime, as those issues draw investor funds, where will the other, harder to define and measure, social issues get their funding from?

With all social issues it is difficult to measure the impact. Not least being due to the impact evolving over an extended period; often exceeding the period of intervention. Systemic social issues can be even more complex and difficult to measure. This makes social impact bonds a risky investment. In time it is possible investors will seek a higher return on investment. This may create unsustainable pressure upon not for profit organisations to achieve a desire result.

The risk of failure, of the nonprofit organisations involved not actually having control over factors that contribute to success, or otherwise suggests that actually achieving the outcome required by Government may not be that easy.

The actual financial return on investment may be as little as 5-6%. There are a great many less risky and financially more rewarding investments available. How long will the shareholders of a public company tolerate investments in these areas? At what point is a decision made that says damn the social impact, lets focus upon getting a return for our investors?

Is the Government saying that if social impact bonds are successful, then public sector costs will reduce and therefore there will be more money available for funding outsourced social services?

Only time will tell whether investing in systemic social problems will lead to sustainable social impact – or whether governments view social impact bonds as a vote winner! It may even be a case of the sector jumping onto the latest fad before there is quantifiable evidence of success to date in either the USA or the UK where these types of bonds are currently being trialed?

As usual, when something new is introduced, there are more questions than answers. Regardless of whether social impact bonds are a game changer or otherwise, they introduce an element of risk to any funded nonprofit service provider. The onus is now upon those board's and their management team to learn about this emerging trend and account for it in their risk assessment and management.

I disagree that SIBs are “consistent with Government policy, being to shift funding and responsibility for outcomes away from Government itself”. On the contrary, SIBs solve a cash flow problem by providing cash for prevention. Government still pays for the outcomes – only it pays a premium for being able to pay later. SIBs will only work where a program can demonstrate that investment in prevention now will result in true savings in crisis intervention and mop up later. I predict that most organisations interested in SIBs will find that they won’t be able to furnish the right kind of evidence to support their case for SIB investment. SIBs are not just another pot of money. They are an investment vehicle for expenditure on intervention programs with a direct and demonstrable link to future expenditure savings.